Monday February 13 2012

Comment: High stakes in oil game, says analyst

By Taimour Lay

Negotiations over the development of Uganda’s oil industry resemble a game of poker in which neither side fully reveals their hand or wishes to declare victory. That is because the companies and the politicians, far from dealing in a zero-sum contest, may turn out to have been on the same side all along. Both have an interest in proclaiming a “mutually beneficial’’ compromise: the companies to satisfy shareholders, the government to placate the public.
But Ugandans watching the drama deserve to know what has really been won and lost and how it will affect them. At it is, they cannot even claim to know the rules of the game when the status of the proposed oil laws are shrouded in legal uncertainty.

Consider the agreement finally reached with Tullow last month. We have been told it is a ‘win-win’ deal. But outsiders peering at the cards on the table are still having their view blocked by the players. President Museveni’s speech to Parliament on February 10 offered a tantalising view of the stakes but left yet more questions begging. If Uganda really has made gains after holding out for over a year, why have the full details of the deal not been made public?

There are signs that progress made in some areas, over the building of a refinery for example, may have come at the expense of making concrete improvements to the contracts. Museveni revealed that there has been no change to the profit-shares, confirming that “after the recovery of their costs, [the companies] will take 42 out of every 100 barrels.” So even once the companies are gaining pure profit from their operations, they are set to get the benefit of 42 per cent for the entire duration of production. It’s an extraordinary deal weighed in their favour, as many warned when the contracts were first leaked in 2010. The government has had over a year to force a re-negotiation of these key terms and has not taken the opportunity.

Museveni’s response would be to argue that profit-share is not the only way Uganda gains revenue from oil. There are also royalties and taxes. This should take government share of total revenue to around 75 per cent. This still remains as much as 10 per cent lower than comparable deals. Indeed, the President seemed to accept as much but argued that future contracts will improve the balance. But these two production deals represent potentially the most lucrative areas and should have been revised to ensure long-term benefits for the state. Instead, Tullow have been given two licences as ‘’compensation for time lost’’ when the delay has been down to their refusal to reshuffle the pack and deal on fair terms.

Tullow’s PSA in Ghana includes a guarantee that Accra can levy a windfall tax on profits when the company hits a particular rate of return. It is a reliable and predictable mechanism for the state to gain when oil prices are high. Indications are that Uganda has not managed to include such a guarantee but has rather negotiated a looser commitment that income tax changes should be possible as long as they do not “substantially and adversely” affect the companies’ projected profits. The concern now must be that any future windfall tax will be countered by the companies with legal proceedings. This, we must presume, was why Museveni did not trumpet the introduction of a windfall tax in his speech. He hadn’t secured it.

Which brings us to a final concern. Museveni reminded Parliament that a key to government revenue optimism was the capital gains tax to be earned when companies sell on to one another. But we already know that this is currently the subject of arbitration and litigation in London. If Uganda loses its fight with Heritage over capital gains, Tullow and others will have a clear precedent that future sales should not incur 30 per cent CGT.

The President’s speech included mention of a conversation with a Chinese minister about future oil prices. Uganda had to sign these agreements quickly, State House was warned, because oil may not be as precious a commodity in 20 years’ time. But ask any oil analyst, consult the US government’s oil projections for the next 50 years: prices are staying high. It was a classic bluff from the companies. The fear is the government fell for it.

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